Most companies selling assets include in the purchase agreement both a non-reliance clause and an exclusive remedy clause.

Non-reliance clauses vary, but in substance, they make the buyer acknowledge that he has not relied on any statement by the seller other than the representations and warranties the seller expressly made in the purchase agreement. Exclusive remedy clauses come in different forms as well. Their purpose is to make clear that the indemnification provisions in the purchase agreement are the sole remedy each of the parties has against the other after closing.

Two recent cases decided in April — AES Corp. v. Dow Chemical Co., heard by the US appeals court for the 3d circuit (reviewing a contract governed by Delaware law), and Citibank N.A. v. Itochu International Inc., heard by a federal district court in New York (reviewing a New York contract and interpreting precedent in the 2d circuit) — considered whether such clauses are enforceable as a bar to federal securities fraud. In the AES case, AES claimed that Dow Chemical Co. and its subsidiary Destec Energy, Inc. committed securities fraud when it sold AES all of the international assets of Destec. One of the assets AES acquired was a Destec subsidiary whose sole asset was a contract to build a power plant in The Netherlands. AES claimed that Dow and Destec conspired to sell the subsidiary at an artificially-inflated price by misrepresenting the prospects for the project during management presentations and in computer models.

The purchase agreement between Destec and AES had no representations about the project. It also contained a non-reliance clause.

The court said that the buyer does not waive its rights under Rule 10b-5 of the US securities laws merely by signing an agreement with such a clause. However, while the non-reliance clause did not automatically bar the securities fraud claim by AES, the court did permit Destec to cite it as evidence that AES might not have relied on the statements at management presentations and in computer models that AES charged were false and misleading.

In the Citibank case, a federal district court in New York came closer to siding with the seller. It said the policy that buyers do not waive their rights by signing a contract with clauses that disclaim reliance on representations made outside the contract and limiting remedies to indemnification is not as broad as the AES court made it sound. The court declined to dismiss the buyer’s claim of securities fraud on grounds that the buyer could point to a representation in the contract that it said was incorrect. The seller had represented that the financial statements of the company being acquired were prepared in accordance with GAAP and consistent with past practice of that company.

While non-reliance and exclusive remedy clauses may not be as effective in barring claims for securities fraud given the recent court rulings, no one is suggesting they should be discarded entirely. They continue to be useful not only to limit the scope of potential claims, but also to serve as evidence of non-reliance in the event the seller must defend itself at trial.

The cases also show that a seller under a New York contract has a better chance of defending a Rule 10b-5 claim based on statements outside the contract. The seller with the worse luck in these cases was defending a Delaware contract in the 3d circuit.